Article January 8, 2021

Back on track and poised for a brighter horizon

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We will remember 2020 as a rollercoaster year as the world grappled with the pandemic and its impact on people and markets alike. Pandemic-induced swings in global markets were mitigated somewhat by co-ordinated fiscal stimulus, which has supported investment markets as we await a full rollout of a vaccine. Meanwhile, the existing priorities of increasing focus on ESG, ensuring a pension scheme’s end game stays on track and of course, fulfilling regulatory changes and requirements haven’t gone away. So what has this meant for pension scheme funding and the steps we have taken on behalf of clients?

Coming into 2020, our emphasis was on robust risk management with high levels of liability hedging and the increasing use of cashflow matching assets. This served clients well whilst our diversified investment portfolios stemmed the initial brunt of the pandemic hitting global markets in March 2020.

Moving forward, we didn’t believe that simply rebalancing growth assets back to their target weight would adequately reflect the emerging client circumstances or enable us to help clients take advantage of the opportunities ahead. As markets rebounded over the latter part of the year, the value of our full investment toolkit approach became clear:

  • With Sponsors seeking contribution deferment and credit spreads expanding, this presented our clients with a very attractive opportunity to support pension outflows using cashflow matching credit.
  • In growth portfolios, purchasing the same growth assets we held at the beginning of the year carried risks as the pandemic unfolded.
  • Employing our scale as a Fiduciary Manager, we identified niche opportunities and seeded new strategies designed to take advantage of market dislocations.
  • Using Structured Equity enabled clients to secure exposure to rising equity markets with the added benefit of significant downside protection should the market fall.

“Looking back on 2020, the most positive development has been the transformative shift to better transparency with more timely sharing of information with clients. This covers the full spectrum from ESG and climate risk analytics, performance and attribution reporting, portfolio positioning and fees.”

Bringing these components together clients have weathered the recent storms well, with them ending the year broadly back on track from a funding perspective. As we look forward hopefully into 2021, our focus is on three key areas:

1) Given persistent covenant challenges for many sectors, we will continue to align our clients with their long-term funding objectives;

2) ESG remains a priority for many clients and we will continue to develop innovative ways to integrate ESG and climate risk management and monitoring into our investment solutions;

3) Taking advantage of investment opportunities as global markets hopefully return to normal, whatever the ‘new normal’ may be.

Looking back on 2020, the most positive development has been the transformative shift to better transparency with more timely sharing of information with clients. This covers the full spectrum from ESG and climate risk analytics, performance and attribution reporting, portfolio positioning and fees.

Through the use of the latest technological solutions, many clients have shifted away from the quarterly meeting cycle, with stale reporting, to one of continuous governance. In doing so, many clients have shifted to shorter, more frequent meetings soon after month-end, empowering trustees with the latest key information. Not only are trustees now better informed to report to their stakeholders, but they can also focus on their key actions and decisions.

As I write this, the UK is rolling out the vaccine, providing light at the end of the tunnel. Whilst we all look forward to a potential return to face-to-face engagement this year, continuous governance is here to stay. It provides the flexibility to engage clients in their preferred format, supporting them in understanding where they are today and in delivering their long-term funding and investment objectives.

For more information on how to prepare your scheme for the challenges to come, please get in touch.

This article constitutes a financial promotion and has been issued and approved by River and Mercantile Solutions, a division of River and Mercantile Investments Limited which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and is a subsidiary of River and Mercantile Group Plc (registered in England and Wales No. 04035248).
Please note that this communication is directed at, and intended for, the consideration of Professional clients only.
The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of investments.

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